What is an employee benefit trust?
Essentially, an employee benefit trust is a type of trust set up by a company to hold assets, which are typically cash or shares, to be used for the benefit of its employees. The trust serves as a legal instrument to provide certain benefits or incentives to the employees, ranging from share schemes and bonuses to other forms of compensation. For example, the funds may be invested in shares, such as by purchasing shares in the employer company or associated entities. According to the Australian Tax Office (ATO), employees can also choose to have their salary paid into their trust, which provides a larger income over time. The idea is to align the interests of the workers with those of the company in order to create a more cohesive and, ultimately, motivated workforce.
Notably, employee benefit trusts differ from other trust structures, and small-to-medium business owners and leaders may be less familiar with them. An EBT’s primary objective is to deliver benefits to the employees. While the details may vary, the main goal remains the same, namely to provide rewards and benefits to workers in a tax-efficient and controlled manner for the organisation.
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How does an employee benefit trust work?
An EBT is typically funded by the employer. This means the company transfers assets, for example shares or cash, into the trust. The trustees, who are tasked with managing the fund’s assets, are then responsible for ensuring that the benefits are distributed to the employees as intended. Importantly, the settlor company does not have legal control over the EBT, the trustees or the funds held, but it can still make recommendations as to how the trust’s assets should be used.
One key aspect of EBTs is the employee benefit trust accounting. Proper accounting ensures transparency and compliance with regulatory norms. It’s not just about tracking incomings and outgoings; rather, the accounting for an EBT involves recording the value of the benefits provided, the assets within the trust and any liabilities. Importantly, the trust has to prepare an annual financial statement, which needs to be audited by a suitably qualified auditor.
Organisations need to be meticulous in their employee benefit trust accounting to ensure that all stakeholders – including the ATO – have a clear understanding of the trust’s operations at any time. After all, proper accounting not only ensures transparency and compliance with regulations but also makes it possible to track the trust’s performance.
Related: Employment Records: Legal Obligations and Best Practices for Australian Employers
What are the benefits of having an EBT?
For some companies, the appeal of an employee benefit trust lies in the tangible benefits it offers the company as well as employees. Here are some key advantages:
Employee motivation and retention
An employee benefit trust can be a very effective motivational tool for workers. By linking rewards to company performance, employees are incentivised to work towards the overall success of the business. In a nutshell, an EBT can give employees a sense of ownership in the company. When employees know that they are beneficiaries of the trust, they are more likely to be motivated and productive in their work.
Tax benefits
A correctly structured employee benefit trust can provide tax benefits for both the company and its employees. For example, employer contributions to EBTs can be tax-deductible, and employee contributions to EBTs can be tax-free. Additionally, the trust assets may be exempt from certain taxes, such as capital gains tax. It’s important that you work with a specialised tax consultant to ensure that all regulatory requirements are met and there are no unpleasant surprises later on for inadvertently breaching tax law.
Related: The Top Things to Know about Fringe Benefits Tax
Bankruptcy protection
The assets held in an employee benefit trust are safe from bankruptcy. In other words, in the event the company goes bankrupt, its creditors cannot gain access to these assets. Instead, the assets remain in the EBT to be used for the benefit of the beneficiaries. Naturally, this can be very reassuring to beneficiaries. In addition, the company is typically expressly excluded from receiving benefits under the employee benefit trust.
Flexibility
Employee benefit trusts are very versatile. From bonus schemes to share option plans or superannuation benefits, you can tailor your EBT to suit your company’s unique needs. What’s more, EBTs offer a great deal of flexibility in terms of how and when benefits are provided to employees. For example, the trustee can decide whether benefits are to be paid out in lump sums or in instalments.
Moreover, using an independent, regulated and audited trustee can serve to reassure employees that all decisions are impartial and in the best interests of the beneficiaries.
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What needs to be considered before setting up an EBT?
While the benefits of employee benefit trusts are clear, companies need to take into account the following aspects before implementing an EBT:
Regulatory compliance
Given the potential tax implications, the first step needs to be ensuring that your EBT is compliant with all federal and state regulations.
The ATO does not have a warm view of EBTs, as they were initially designed to defer or avoid tax on the company’s profits, and warns the structure of an EBT avoids liability for fringe benefits tax. The ATO can offer some direct advice to employers through its private ruling system. Employers can also use this system when they lodge their tax return to outline their situation.
Engaging a tax professional when establishing an EBT to ensure the company meets its tax obligations is recommended and to avoid harsh penalties for not doing the right thing. An EBT also can trigger a taxpayer alert for the ATO and a tax professional can assist in these situations.
Set up and management costs
It’s clear that establishing and running an EBT requires resources. Organisations, therefore, need to factor these in when considering the overall pros and cons of setting up an employee benefit trust. As well as the tax professionals and auditors required to monitor the establishment and operations of the EBT, an employee or other representative may need to be appointed to oversee it and make decisions, for which they are usually financially compensated.
Employee perception
It always matters what your employees think, especially when you introduce new processes. When it comes to EBTs, it’s important that your staff see them as a genuine benefit. To ensure this, communicate any trust-related information clearly and transparently.
As it is a relatively new concept in Australia, be sure to explain all the benefits and pitfalls of introducing an EBT.
In particular, be upfront about the tax that employees may be obligated to pay because of this scheme, as the amount that is contributed to the trust on behalf of the employee may still be assessable as part of their individual income tax.
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What’s next for EBTs in Australia?
In the ever-evolving and often unpredictable business landscape, Australian organisations need to stay competitive in attracting and retaining staff and that includes using tools that can help them achieve this. Looking to what tools are used by businesses located overseas can be a good way to get new ideas, and employee benefit trusts offer a tried-and-tested solution for companies looking to motivate and retain their staff. However, employers must ensure that they are following Australian tax laws and are meeting their obligations.
